7 Levels of Investors: How to Invest And Build Up Your Ideal Portfolio

Dan LokMarch 14, 2019 Comments

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Some people fear losing money everyday when they invest while others never fear it. The difference between these two types of people is not income level. That’s not what makes them afraid or confident.

Instead, what separates them is their decisions with money.

You see, if you know how to invest, if you know how to build your investment portfolio, you won’t fear changes in the stock market or unexpected bills. You’re wise enough to know that you don’t need to make more money to be able to save it because saving it isn’t the answer.

Saving your money may help with future debts but it isn’t going to get you to financial freedom. What you need to do to build your wealth is to invest it, and the amount you invest has nothing to do with income level.

Instead, what you invest is an indication of your financial confidence: your knowledge and skills when making decisions about money.

The way we save and make money can be grouped into seven types. I learned about these seven levels of investors from Robert Kiyosaki, and over the years, I’ve put my own spin to it.

While it’s common for one investor to drift a little from one type to another, most people stay fixed at one type for their entire lives.

Watch this video about the seven types of investors.

Level 0: Non-Existent Investor

At level zero, you have no investments or savings. You are oblivious of money matters in general or your spending habits in particular. You usually complain that you aren’t making enough money, or if you made just a little bit more money, everything would be okay.

The problem is your money management habits. Mike Tyson is an example of a non-existent investor. During his 20 year career, his income exceeded $400 million. Yet before his 39th birthday, he was $8 million in debt. Then $30 million. So he was $38 million in debt. You might say, someone who makes millions a fight can’t be broke. But his financial statements say otherwise. He has the cash flow of a poor person. In fact, he’s worse than poor. If your net worth is zero, you’re richer than him.

Level 1: The Borrower

If you’re a borrower, you’re often in far worse financial position than the non-existent one although their potential for change is greater. You usually make a bit more money than level 0. You have high debt because you spend all you make and more. Your idea of financial planning is to get a new Visa or Mastercard.

You live in complete financial denial and have often come to believe the situation is hopeless. When you are depressed, you buy more and get more debt.

Level 2: The Saver

As a saver, you usually set aside a small amount of money on a regular basis. The money is usually deposited into a low risk, low returning vehicle such as a term deposit or money market account. You save to consume.

You’ll save to go on a vacation, then save to buy a car, or save to buy a big TV. You are afraid of financial matters and won’t take risks. You’ll drive many hours to save a few dollars. You’ll even line up on Boxing Day for 10 hours to save on one item.

Level 3a: Passive Investor

Passive investors are aware of the need to invest and top up their RSP or 401K by making employee contributions or outside investments like mutual funds, shares, stocks, or bonds. This level makes up two thirds of the middle class. If you’re here, you’re financially illiterate. You don’t like to take risks.

You like to say things like, “I’m not very good with numbers,” or “I prefer to leave the money decisions to the professionals.” You’ll leave things in the hands of your financial planner but have little idea where things are invested or why. You also believe high rates of return like 20 percent are either illegal or impossible. You believe what you read in the news and do what others tell you to do.

Level 3b: Passive Investor Gambler

At this level, you don’t like to take risks but you also like to use sophisticated investment techniques such as margins, puts, and calls, without understanding what you’re really committing yourself to. Most of the time, you don’t discuss your losses with anyone, but always brag about your wins. You like to gamble.

I’ve seen entrepreneurs work very hard their entire lives to accumulate quite a bit of money. Then they take another person’s advice and in one year they lose what took them 10 years to make. It’s in the nature of entrepreneurs to work hard, so they’re smarter next time. But they’ve already lost decades of time because they took a gamble.

Level 4: Automatic Investor

Automatic investors are aware of the need to invest but they are also actively involved with their investments. If you’re at this level, you have a long term plan that will enable you to reach your financial objectives. You follow the plan of the wealth triangle: have a high-income skill, build a scalable business, and have high-return investments.

You don’t use the fancy stuff that money managers use, like options or margin accounts. You buy good shares, proven managed funds or solid funds, and hold them for the long term. Warren Buffett is an automatic investor.

Level 5: Active Investor

If you’re an active investor, you manage your own money, and don’t trust other people with it. You have clearer awareness about investments and rates of return. You don’t necessarily take the advice you hear.

For example, I’ve worked in finance. I can say that 97 percent of mutual funds don’t work. Only 3 percent of the 5000 funds in Canada work, so I would not take the advice of financial advisors.

Active investors have to be clear on investing principles, which are the rules of investing. Your vehicles might be real estate or private companies. You actively participate in managing your investments, and don’t just put aside your money and hope it grows.

You are always looking, monitoring, and seeing how you can add value. You optimize performance and minimize risk, getting long term annual returns of 20 to 100 percent. You intimately understand money and how it works.

This type of investor has cash flow. You spend what you want after your assets crank out the cashflow for you. I am at this level.

Level 6: The Capitalist

Few reach this level and fewer manage to remain there. They are the Rockefeller’s, the Kennedy’s, the Fords, the Bill Gates, the Warren Buffets. They have two motivations to investing. They are good managers of their money while they are alive, and they leave a legacy to continue after they are gone.

No matter what your income level is, start investing. Have a financial plan for your future. Begin at the first level and work your way up. Remember, investing is about how much money you keep and what you do with it.